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As Jakarta prepares to host the World Economic Forum East Asia, investors are asking whether the AEC will be fully formed and functional by the end of 2015 and, if so, what the impact on business will be. JLL’s Todd Lauchlan shares his view of South East Asian integration from the region’s biggest market, Indonesia.
‘Trust in East Asia’s new regionalism’ is the theme of this year’s World Economic Forum East Asia and, with the ASEAN Economic Community (AEC) set to take shape by the end of the year, never has the subject of regional integration been a more pertinent theme for South East Asian leaders.
But will the economic cohesion promised by ASEAN come to fruition? It’s a question on the lips of every business leader in South East Asia and, for many, the answer is a resounding ‘no’; at least not in the short term.
“The AEC is a statement of intent, but it should offer investors’ confidence in the region’s potential,” said JLL Indonesia Country Head, Todd Lauchlan, as he prepares to mix with heads of state and investors alike at the region’s most high-profile meeting of minds next week.
“It’s unlikely to bring about a lot of changes overnight,” Lauchlan’s sentiment echoes that of many business leaders who remain sceptical about the level of impact the AEC will have.
A recent survey from the US Chamber found that just four percent of respondents think that ASEAN will realise its AEC goal by the end of this year and 52 percent believe the ambitions will not be fully realised until 2020.
And the concept is, indeed, ambitious.
Through the “free movement of goods, services, investment, skilled labor and free flow of capital”, ASEAN would be seventh largest economy in the world with a combined GDP of US$2.4 trillion. It would be fourth largest by 2050 if growth trends continue and, with a collective population of over 600 million people, ASEAN’s potential market is larger than the European Union or North America.
When fully implemented, the AEC has the potential to increase ASEAN’s annual growth rate to 7.1 per cent by 2025, surpassing China’s growth high, and up from the average growth of around 5 percent.
The view from Indonesia
Both geographically and economically, Indonesia is the region’s biggest player, making up nearly 40 percent of ASEAN’s economy. It’s considered key to the AEC’s success.
“The Indonesian government at the top level is very supportive of the flow of people, services and ideas,” added Lauchlan.
”President Joko Widodo has been vocal about his keenness to see foreign investment and he was at the ASEAN forum just a month into his term speaking about why Indonesia is a great place for investors.”
“More foreign money coming in is obviously a positive thing.”
Despite setbacks in 2014 due to the depreciation of the Indonesian rupiah against the US dollar, falling oil prices and political uncertainty surrounding the general election, foreign and domestic direct investment in Indonesia totalled USD $37 billion by year-end, a 16.2 per cent increase from the previous year.*
“Jokawi being elected coincided with a wider negative macro situation; commodity prices fell, oil price fell, which is a long term positive but short term negative, but we’re seeing a lot of projects coming together now that the election is out of way.”
Indonesia’s industrial sector, for example, is growing. From car manufacturers to adhesive and ball bearing businesses and logistics companies, business is booming in Indonesia’s core markets, including Jakarta and Surabaya.
The hospitality industry, too, is profiting from a weaker Rupiah and growth in both the domestic Indonesian and international travel markets.
But despite the growing investor interest, Indonesia, like many of the region’s emerging nations, remains blighted by its ever-present inherent weakness: sub-standard infrastructure.
Lauchlan is keenly aware of this and, as the WEF looms, it is more than a networking opportunity; at this critical juncture, it could serve as an investor showcase for South East Asian potential.
“The reality is the big companies will use it as an opportunity to showcase projects. Networking aside, the WEF this year is about understanding in detail what the AEC can bring.”
* According to figures from the Indonesia Investment Coordinating Board (BKPM).